Should fiscal authorities co-operate in a monetary union with public deficit targets?

Abstract:

The Stability and Growth Pact (SGP) aims at reducing the deficit bias and inducing fiscal policy co-ordination in EMU. This article shows that, under positive (demand or supply) shocks, average deficits and interest rates with fiscal co-ordination can be higher than without co-ordination, thus making two of the aims of the SGP incompatible.